Build-A-Bear Workshop 2012 Annual Report Download - page 21

BUILD-A-BEAR WORKSHOP, INC. 2012 FORM 10-K
desirable locations and operate stores profitably, particularly
in multi-store markets, is a key factor in our ability to grow
successfully. We cannot assure you as to when or whether
desirable locations will become available, the number of
Build-A-Bear Workshop stores that we can or will ultimately
open, or whether any such new or relocated stores can be
profitably operated. We have not always succeeded in
identifying desirable locations or in operating our stores
successfully in those locations. For example, in 2012, 2011
and 2010, we closed two, five and four locations,
respectively, prior to the expiration of their respective leases.
Prior to 2010, we had closed four stores since our inception
(excluding four stores that we closed in connection with our
2006 acquisition of Amsbra and The Bear Factory in the UK).
We may decide to close other stores in the future. Our ability
to successfully manage our portfolio of stores also depends on
our ability to:
• negotiate acceptable lease terms, including desired
tenant improvement allowances;
• finance the costs of closing, relocating and opening
stores, including, severance and termination fees for store
closures and capital expenditures and working capital
requirements of the new and relocated stores;
• manage inventory to meet the needs of new and existing
stores on a timely basis;
• hire, train and retain qualified store personnel;
• develop cooperative relationships with our landlords; and
• successfully integrate new stores into our existing
operations.
In July 2005, we opened our flagship store in
New York City. This store is much larger than our typical mall-
based stores and as such, we may be unable to generate
revenues from this store at a level that justifies keeping the
store open. Closing this store could not only have an adverse
impact on our sales if we are unable to establish other retail
locations within the market, but, as our flagship store, it could
also have an adverse impact on the Build-A-Bear Workshop
brand and consumer perception of our brand.
Increased demands on our operational, managerial and
administrative resources as a result of our store strategy could
cause us to operate our business less effectively, which in turn
could cause deterioration in our profitability. Additionally,
closing multiple stores could have an adverse impact on the
Build-A-Bear Workshop brand and consumer perception of
our brand.
We may not be able to operate our foreign company-owned
stores in the United Kingdom and Ireland profitably.
In April 2006, we acquired The Bear Factory Limited, a
stuffed animal retailer in the United Kingdom owned by The
Hamleys Group Limited, and Amsbra Limited, our former
United Kingdom franchisee (the UK Acquisition). Both The
Bear Factory and Amsbra had losses prior to our acquisition.
Although we have realized some benefits from these
operations as part of our larger company, we may be unable
to continue to do so on a consistent basis. In particular, we
face business, regulatory and cultural differences from our
domestic business, such as economic conditions, changes in
foreign government policies and regulations and potential
restrictions and costs to convert and repatriate currency, as
well as other risks that we may not anticipate. We also face
difficulties realizing benefits because we have less brand
awareness than in the U.S., face higher labor and rent costs,
and have different holiday schedules. In 2007, we terminated
our French franchise agreement and opened three
company-owned stores in France. We were unable to operate
the stores in France profitably and in 2010, we closed all
three of our company-owned stores in France. Additionally
in 2012, we recognized an impairment charge on all of the
goodwill associated with our UK acquisition along with the
store assets at certain store locations with poor operating
results.
Our leases in the United Kingdom and Ireland also
typically contain provisions requiring rent reviews every five
years in which the base rent that we pay is adjusted to current
market rates. These rent reviews require that base rents cannot
be reduced if market conditions have deteriorated but can be
changed “upwards only”. We may be required to pay base
rents that are significantly higher than we have forecast. For
example, past rent reviews have resulted in increases as high
as 40% in select locations within the United Kingdom. As a
result of these and other factors, we may not be able to
operate our European store locations profitably. If we are
unable to do so, our results of operations and financial
condition could be harmed and we may be required to record
significant additional impairment charges.
If we are unable to renew, renegotiate or replace our store
leases or enter into leases for new stores on favorable terms,
or if we violate any of the terms of our current leases, our
growth and profitability could be harmed.
We lease all of our store locations. The majority of our store
leases contain provisions for base rent plus percentage rent
based on sales in excess of an agreed upon minimum annual
sales level. A number of our leases include a termination
provision which applies if we do not meet certain sales levels
during a specified period, typically in the third to fourth year
and the sixth to seventh year of the lease, which may be at
either the landlord’s options or ours. Furthermore, some of our
leases contain various restrictions relating to change of control
of our company. Our leases also subject us to risks relating
to compliance with changing mall rules and the exercise of
discretion by our landlords on various matters within the
malls. In addition, the lease for our store in the
Downtown Disney®District at the Disneyland®Resort in
Anaheim, California currently expires in 2013 and we have
not reached agreement on renewal terms. This lease provides
that the landlord may terminate the lease at any time, subject
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